Domain has coped well throughout the pandemic and is beginning to enjoy the much improved conditions. The underlying strength of the residential housing market was never really threatened by COVID but rising interest rates might present a new challenge.
DHG enjoyed a strong 1H22 as volumes increased 14% and controllable yield grew 19%. That brought EBITDA to $61 million for the period, an increase of 14.2%.
Core residential depth revenue was up 33.5% including the 19% yield boost made up of 10% price and 9% depth. DHG achieved this despite an approximately 10% impact from weak AllHomes revenue early in the period and weak rental revenue.
DHG’s print revenues bounced solidly from a low base and an easy comparison to a locked down 1H21. Print revenue and earnings have shrunk to an almost immaterial level over the years in this industry, but strategically it remains very useful. It still attracts high value and passive buyers, and agents enjoy the promotional platform. Print provides opportunities for bundling with premium digital products. As long as DHG can control the costs, which it is doing, print’s future is safe.
The balance sheet remains steady with net debt at $166.4 million putting leverage at 1.4x.
Investment view
It seems the momentum in Australia’s dynamic residential property market has overridden the impacts from COVID restrictions although we think listings growth should flatten in FY23f. We still see room for further yield growth in FY23f, but this will be accompanied by slightly higher cost growth (low teens) as guided by the company.
DHG said the first few weeks of trading in 2022 have continued the growth in new listings and the momentum is undisturbed, for now. DHG did not quantify the ‘good start’ but we know REA said its listings were up 14% in January.
The removal of most COVID-related restrictions in NSW and Victoria should unleash more activity in the third quarter but the approaching Federal election will cause many people to defer big decisions such as moving home. The threat of rising interest rates may also bite into activity as the calendar year unfolds. Volumes could therefore flatten out at mid-cycle levels in the foreseeable future.
Operating leverage is high in this business so even with slower revenue growth, consensus forecasts are pinning EBITDA growth at 16% in FY23f.
DHG is trading at a EV/EBITDA multiple of ~18x FY23f compared to REA at 23x.
Risks to investment view
Growth in listings volume may slow down due to the approaching Federal election and possibly due to the threat of rising interest rates. Competitive pressure may also subdue yield growth.
Recommendation
We have retained our Buy recommendation.
